The amount and rate of borrowing are increasing in the country. This indicates a growing appetite for loans by Kenyans. Some of the factors driving this growth of taking a loan in Kenya is the increase in the number of loan service providers both in terms of the number and convenience.
Currently, it is possible to access a loan within a few seconds in the country. All you need is access to one of the tens of mobile lending apps available.
However, the ease of access to loans is tempting many Kenyans to get into debt even when it is not necessary. This brings the need to discuss factors to consider before taking a loan in Kenya.
Although access to loans could be easy, failure to repay on time comes with consequences. Some of which could be devastating. These include getting a negative listing with the Credit Reference Bureau (CRB) and in some extreme cases result in assets auctioning
Purpose of the Loan
You should only take a loan when there is a clearly defined purpose. This is because it comes at a cost in form of fees and interest.
The best purpose to take a loan is when you are getting it for investment. Some of the investment opportunities in real estate. An investment is an undertaking that should help you generate more income in the future.
Hence, the benefits you get from the investment far outweigh the costs and risks of taking a loan.
You should avoid taking loans for consumption purposes. These include taking a loan to fund the day-to-day costs or entertainment. This is because you derive no value from such loans yet they come at a high cost.
Another purpose that could drive you to loans is emergencies. However, you can mitigate this by having a savings fund that you can use during such times.
Cost of the loan
Loans come at a cost. With interest, insurance, and renewal fees forming part of the costs. To make it affordable, you should keep the costs as minimal as possible. In the long term, this reduces the amount you pay to maintain and clear the loan.
With lenders having different rates, you need to do adequate market research to identify the best rates in the market.
It is also important to consider the formal financial institutions such as the banks and Saccos as the lending costs are controlled by the relevant regulatory institutions. Normally, the cost of credit from these institutions is relatively lower compared to shylocks.
Shylocks operate in an uncontrolled environment and hence have no control over the pricing.
The loan amount should be clear and precise to enable planning. It should be closely tied with purpose. As an example, if you want a loan to buy an asset, you need to understand its total value to enable a guide on the amount of loan to take.
The amount of the loan also helps determine some key lending elements such as the loan tenure and the interest rate. You should avoid taking a higher amount than you need as it will result in wastage of the excess amount and end up increasing the costs in the long term.
However, the ideal position is having some savings to help reduce the loan size. The loan amount is also key to determining the source. Different institutions are suitable to offer different loan sizes.
The SACCOs and microfinance are ideal when seeking small loan amounts while large institutions such as the banks are ideal for the bigger loan amounts.
Financial institutions use different types of collateral to secure their money. Some of the most used securities include land and other assets such as cars.
However, there are some financial institutions such as SACCOs that use a member guarantors approach for security. Hence, it is important to consider security before taking a loan in Kenya.
If you don’t have tangible or adequate security, perhaps it would be wise to join a Sacco that has members who can guarantee you. Else, you can consider the financial institutions offering unsecured loans.
In some instances, the security is guaranteed especially if you plan to get a loan for purchasing an asset such as a car. In such a case, the car’s logbook becomes the automatic loan security.
You should take adequate caution when securing a loan because you could end up losing it through auction in the event of default. Thousands of Kenyans have fallen to the auctioneer hammer due to their inability to meet their loan obligations.
This is why the purpose of a loan should be very clear to avoid misuse.
The quality of the security is also a key factor to consider as some financial institutions normally use discounting for loan security. As an example, the discounting could be in form of 50% or 80%. Hence, the higher the asset quality, the lower the discounting.
Highly risky assets such as shares normally get deeper discounts.
I always insist on the importance of insurance as it acts as a security due to emerging threats beyond your control. Hence, you should ensure your loan is insured.
Take an example of a car. The risk of owning a car is usually high due to the high chances of accidents and other elements such as theft. Hence, if something happens to the car without insurance, you will be left without it and with a loan to clear.
However, if you have insurance cover, it takes care of the loss-making the financial impact minimal. Insurance also helps to protect your next of kin in case of a tragedy such as death as it helps clear the balance.
Debt should act as the last resort. This is because it is conditional and comes at a cost. Before taking a loan, you should consider using your savings. If they are inadequate, the second option should be to seek soft loans from friends and relatives.
However, if you have to take a loan in Kenya, ensure to consider the above factors in order the keep it as minimal as possible. They also ensure the loan is affordable and it is fulfilling the intended purpose.